The Secretary of State for Business, Innovation and Skills (Vince Cable)
Last September, I published papers which explored the issues around the rapid growth in executive pay in our largest listed companies. Yesterday I announced the package of measures that the Government will take forward to tackle this issue on four fronts:
Greater transparency;
More shareholder power;
Reform of remuneration committees;
Best practice led by the business and investor community.
Through secondary legislation later this year the Government will require companies to publish clearer and more informative information about how executives are being rewarded. This starts with remuneration reports being split into two sections: one detailing the proposed future policy for executive pay; the other setting out how pay policy has been implemented in the preceding year.
When outlining future policy, remuneration committees will be expected to explain why they have used specific benchmarks and how they have taken employee earnings—including pay differentials—into account in setting pay. They will have to explain how they have consulted and taken into account the views of employees.
Companies will be required to say clearly and succinctly how the proposed pay structures reflect and support company strategy; how performance will be assessed; and how it will translate into rewards under different scenarios.
When reporting on pay for the previous year, companies will have to provide a single figure for total pay for each director and to explain how the pay awards relate to the performance of the company. To provide context, companies will be mandated to produce a distribution statement, outlining how executive pay compares with other dispersals such as dividends, business investment, taxation and general staffing costs.
Alongside more information, shareholders need new powers to hold the board to account. I will consult shortly on proposals to reform the current voting arrangements and give shareholders a binding vote, enabling them to exert more pressure on boards. The consultation will include the following options:
A binding vote on future pay policy, including details of how performance will be judged and real numbers on the potential pay outs directors could receive. Companies will have to include a statement on how they have taken account of shareholder views and the result of previous votes.
A binding vote on any directors notice period which is longer than one year and on exit payments over one year’s salary.
Binding votes are more difficult to apply retrospectively because of contractual complications and I will consider whether there should be further sanctions when a remuneration committee report attracts significant dissent on an advisory vote.
The consultation will also look at what level of shareholder support companies should have to get in order to pass pay proposals, and consider raising the threshold for a successful vote to 75% of share votes cast for the motion.
The Government will address fundamental conflicts of interest in the pay-setting process. We will require greater transparency around the role of consultants, how they are appointed and paid, and to whom they report and advise. I will also ask the Financial Reporting Council to amend the UK corporate governance code to put an end to the practice of serving executives sitting on the remuneration committees of other large companies.
This package of measures will create a more robust framework within which executive pay is set and agreed. However, lasting reform depends on active shareholders and responsible business leaders accepting the need for change and pushing the agenda forward. In the following weeks and months I will strongly encourage business and investor groups to build on the current momentum for reform, agree on what best practice looks like and promote this more widely.